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Following Flawed Business Acquisition, Chancery Dismisses Derivative Complaint for Failure to Plead Demand Futility

City of Coral Springs Police Officers' Pension Plan v. Dorsey, C.A. No. 2022-0091-KSJM (Del. Ch. May 9, 2023)
A terrible business decision does not ensure the Court of Chancery will sustain a derivative claim. A derivative plaintiff still must allege that a board of directors wrongfully refused a stockholder's demand to bring suit or that making a demand on the board would be futile because a majority of the board either was interested in the transaction or would face a substantial likelihood of liability for approving the transaction, or was dependent on someone who was interested or faced a substantial likelihood of liability.

A payment processing company (Block) had acquired a deeply troubled music streaming company (TIDAL). The genesis of the transaction was the personal friendship and professional collaboration between the acquirer's chairman/CEO (Jack Dorsey) and the target's lead investor (Shawn Carter, aka Jay-Z). The acquirer's board formed a transaction committee to review the proposed transaction. Over several months, the committee held three meetings and then approved the acquisition, notwithstanding concern about the target's financial performance and future prospects. The only member of the acquirer's senior management that supported the acquisition was the CEO. Following the acquisition, the target's lead investor joined the acquirer's board. The plaintiff sought books and records and then filed a derivative complaint.

The Court of Chancery granted the defendant's motion to dismiss the complaint for failure to plead demand futility. Although the chairman and the target's lead investor were conflicted, the remaining ten directors would not have faced a substantial likelihood of liability. To justify demand futility, the plaintiff alleged the directors failed to act in good faith. The Court determined that although the ten directors had approved a flawed business decision, the committee members' engagement in the process of reviewing the proposed transaction and the overall board's approval of the transaction were not indicative of the kind of rubber-stamping or indifference that would support a pleadings-stage inference of bad faith. Accordingly, the plaintiff had failed to plead that demand was futile.

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